Barclays’ buffered performance notes linked to Euro Stoxx score high on return, lower on value

By Emma Trincal

New York, Nov. 7 – Barclays Bank plc’s 0% buffered performance securities due Nov. 29, 2019 linked to the Euro Stoxx 50 index have a high-yielding underlying benchmark and a relatively longer maturity. They offer benefits such as a 20% buffer and uncapped leverage, but pricing could have been better, said Tim Mortimer, managing director at Future Value Consultants.

If the index finishes at or above the initial level, the payout at maturity will be par plus 136% to 146% of the gain, with the exact participation rate to be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 20% and will lose 1% for every 1% decline beyond 20%.

The notes fit into the leveraged return category in Future Value Consultants’ methodology.

The category enables the research firm to compare the product with products of the same structure type when assigning scores.

The firm assesses risk, return and price in its research reports using a variety of proprietary scores in order to compare a product to all others or its peers.

Mortimer looked at the value of the notes first, as measured by the price score, a rating that determines the value on a scale of zero to 10. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes scored 6.40 on the price scale, which is less than the 7.64 average score for the leveraged return product type, according to Future Value Consultants’ report. The average price score for all products is 7.43.

“The price score is a bit low as compared to the rest of the market,” he said.

“The 1.4 times leverage on the Euro Stoxx is quite high. There is some protection down to the 80% level, and that’s a true buffer. You can lose up to 80% of your investment but not all of it.”

Future Value Consultants picked a hypothetical leverage factor of 1.4, which is close to mid-range, he said.

Disappointing value

“This note should offer some value because you are giving up the yield of an index that pays higher dividends than the S&P 500, and we find a lot of S&P deals in this category of notes we’re scoring. In addition, you are foregoing dividends for five consecutive years,” he said.

The dividend yield of the Euro Stoxx 50 is 3.37%. In comparison, the S&P 500 index’ yield is 1.87%.

“It looks like a good deal at first. The buffer is reasonable. The participation is good. There is no cap. And yet, the price score is less than the average in this leveraged return category. It’s also lower than the market in general,” he said.

The leveraged return category includes all notes with upside leverage regardless of the downside exposure or duration.

The product’s relatively long duration allows the issuer to eliminate the cap, he said.

“Pricing a no-cap structure on a short duration does not give you enough value to play with. In this deal, for instance, they had more dividends to play with. When you price a structured note, you convert the risk-free rate and the credit spread into derivatives. The longer the term, the more you can exchange for an option, so in general, the longer the maturity, the more upside you can get,” he said.

“Also, with the high dividends, they can generate some value to create the buffer.

“So they have the elements to get value from somewhere. And yet, it doesn’t translate into a higher price score.”

Risk

The risk associated with a structured note is measured by Future Value Consultants’ riskmap. The rating measures the risk on a scale of zero to 10 with 10 being the highest level of risk. The riskmap is obtained by adding its two sub-components: market risk and credit risk.

With this structure, the riskmap is slightly above the average for the product type at 3.47 versus 3.28, respectively.

The product’s credit riskmap is 0.85, compared with a 0.56 average score for the category.

The credit risk is higher due to the creditworthiness of the issuer but more importantly because of the longer term, Mortimer said.

The market riskmap is 2.62 for the product against an average of 2.72 for the category.

“With the market riskmap, you have two elements. The 20% buffer is going to reduce the risk. But at the same time, you have an underlying index that’s more volatile than the S&P. So one offsets the other partially,” he said.

“The difference between the score and the average is not high at all.”

High return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets, and high- and low-volatility environments. The bullish assumption is the one used in the model for this note.

The return score is 8.42, compared with an average of 7.76 for the product type.

“It’s high, and it’s typical to have a high return score when you have that type of maturity and no cap. It gives you the opportunity to generate more gains as the market continues to go up,” he said.

Average overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

With the 7.41 overall score versus 7.70 for the average leveraged note, the final score suffers from the low price rating.

“Despite the good risk-adjusted return, this product lags on the price score,” he said.

“In our opinion, the value of the assets is not high enough.

“You can extract value from different places and put it somewhere. Our analysis suggests it has not been the case.”

But because of the above-average return score, the note still maintained an average overall score.

“It is for someone who seeks exposure to the Euro Stoxx, someone who is bullish and does not want a cap. It is a simple trade. It could work for someone who, looking at the maturity, the buffer, the participation, the credit of the product, would be satisfied.”

The notes (Cusip: 06742Y568) will price Nov. 25 and settle Nov. 28.

Barclays and UBS Financial Services Inc. are the agents.

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